Politics, Footnotes, and Your Children

Apr 19, 1998

Article By: Scott Burns

Your grandmother has been living it up, spending money you never knew she had. The surprise comes when she dies and the executor of her estate informs you that, without your knowing it, she borrowed against your 401k plan.

Please surrender it.

That, in a highly personalized way, is the problem economist Lawrence J. Kotlikoff has been dealing with, only he does it by measuring what all the grandmas are doing to all the grandchildren. He calls it generational accounting.

Unfortunately, the people who should be talking about the problem aren't.

"You know," he says, "it has disappeared from the budget altogether now. It was in two Bush budgets. It was in the first Clinton budget, too, but as a footnote. After there was more discussion of those few pages than the entire budget, the subject was dropped."

Now, Professor Kotlikoff said, the subject is completely politicized.

I asked him to explain.

"The CBO ( Congressional Budget Office) doesn't want to publish new work that colleagues have done."

Generational accounting isn't sexy like the spending and activities of the CIA, NSA, or Men in Black. But it is far, far more powerful. Professor Kotlikoff, an economist at Boston University, is its originator and prime mover. His approach to government policy analysis, which is likely to put him on the Nobel short list one day, has rapidly been adopted by at least 25 nations.

Why did they adopt his method of accounting for the "inter-temporal" distribution of government costs? Because every nation is struggling with the same grandma versus grandchild questions that we face right here: whether the next generation is going to suffer from "taxation without representation" as they are given whopper tax bills by the previous generation.

Moments later, speaking at a meeting jointly sponsored by the Dallas Federal Reserve Bank and the National Center for Policy Analysis, Professor Kotlikoff said that unless there were major policy changes the lifetime tax rate on the next generation would be nearly 50 percent. That's a lot higher than the 30 to 33 percent that current taxpayers have experienced. Worse, the longer the delay, the more difficult it would be to make changes anyone could imagine.

In the event this is all new to you, let me explain. Governments make promises in two forms. The best known form is debt: they borrow from people today with the promise of returning the money, with interest, in the future. We read a lot about this type of promise because lots of people understand it, even if the numbers are in trillions. The second form of government promise is in programs--- things like Social Security and Medicare--- where there are no bonds but the government collects revenue today with the promise to make payments of income and benefits in the future. Very few people, including most politicians, understand this because it more complicated.

Which brings us to the unpublished paper.

Jagadeesh Gokhale at the Cleveland Reserve Bank and Benjamin R. Page and John R. Sturrock at the Congressional Budget Office, have updated the generational accounts. They also did a sensitivity analysis to see what government policy changes--- higher taxes, lower spending, reduced Medicare, etc.--- could put the generations on level ground.

I called Mr. Gokhale and asked for a copy.

After taking account of every dime to be paid in taxes while they are living, the current generation will pay the equivalent of $22.1 trillion in taxes… but leave a tax deficit of $9.4 trillion to the unborn.

The only way to make good on the promises is with higher taxes… or to renege by making reductions in promised benefits. Without changes, the lifetime tax rate on the next generation figures to 49.2 percent. That's a lot more than the 29.6 percent of my mothers' generation (1920); the 32.5 percent of my generation (1940); or the 32.4 percent of my children (1970). The researchers determined that it would take both a major slowdown in health care benefit growth and a near perpetual freeze on real government spending to drop the lifetime tax rate of the unborn down to 33.5 percent.

But wait. It gets worse.

Every year of delay by politicians will require more drastic action. Waiting until the year 2016 when the boomers retire, for instance, could bring this country to the edge of revolution.

Journalistic hyperbole?

I don't think so. Read this statement from page 24 of the report the Congressional Budget Office isn't publishing.

"Such a long delay in restoring balance will involve unrealistically high tax increases, benefit cuts, or purchase reductions. For example, it would involve defaulting on 95 percent of Social Security's implicit obligations to living generations."

Confused? Want to learn more? There are good resources on the world wide web.

If you are new to the subject, the NCPA reports are the most readable.

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